When, Why and How to Take Physical Inventory

by Mark Henricks

Retail sales systems can automatically and accurately track items that are sold, but only regular physical inventory counts can accurately show a business owner what items are actually on hand. Shrinkage and overages inevitably render stock records inaccurate, but using a combination of manual counting and technology assistance can provide a physical inventory that will help identify sources of shrinkage—such as employee theft—and avoid balance sheet surprises.

Scheduling Physical Inventory

Physical counts can be done annually, quarterly, monthly, weekly, or in the case of high-value items that may be subjected to a lot of shrinkage, even daily. Even when a complete physical inventory is planned, high-value items should be identified in advance with extra attention given to counting them accurately.

Ideally, physical counts should be scheduled during slow times such as weekends or holidays to minimize impact on sales, and it's important that physical counts be conducted as quickly as possible to ensure reduced disruption. Third-party inventory services can provide trained specialists to help conduct inventories speedily and accurately without distracting employees from their regular duties.

Getting Ready for the Count

Taking a physical inventory necessarily involves considerable manual effort—but technology can help. Barcode readers come in several formats ranging from relatively high-cost portable data terminals specially designed for inventories, to low-cost apps that turn a smartphone into a barcode scanner. Data scanned in by barcode readers or typed in by humans can be fed into inventory software that generate detailed reports and help with auditing by identifying inventory anomalies.

To prepare for taking physical inventory, clean up retail areas, warehouses, and storage spaces where the items are stored and counting will be conducted. Include off-site locations, such as third-party storage facilities. Be sure to also identify items that are present but will not be included in inventory because, for instance, delivery has not been formally taken from the shipper.

Divide the spaces where inventory is kept into areas small enough to be handled by human counters, and assign counters to specific areas. Train inventory takers to use the technology. They should also be instructed in counting techniques, such as how to count items that may come in individual lots or packaged in multi-unit cartons.

Before you take inventory, stop selling and receiving deliveries. Assemble inventory takers in teams of at least two people, with one to do the counting and the other to note quantities and enter them into a database.

Taking Stock of Your Stock

Once the inventory is completed, generate reports from the inventory management software that will tell how much of each item is present and where quantities are located. If any anomalies are found—such as a large difference between expected and counted quantities—investigate to find an explanation.

Physical inventories are time-consuming, costly, and unfortunately, inexact. Dishonest employees, for example, may be able to find out in advance when inventories are occurring and take steps to cover up pilferage. This is one reason to consider using an outside third-party inventory service. Another solution is to have teams of employees double-check counts done by other employees in their own areas. Employees should generally not be responsible for auditing their own counts.

Another limitation is that even in a complete physical count, it's challenging to focus much attention on every item in an extensive inventory. Sometimes, most attention is paid to a couple dozen high-value items, and problems with other items end up being missed.

Retailers can minimize surprises from physical inventories—and possibly reduce the need for frequent physical counts—by employing good sales records and routine inventory management practices. Some technologies, such as radio frequency identification (RFID tags), can improve accuracy of day-to-day inventory management.

In the end, physical counts of inventory remain a basic and virtually inescapable practice of financial and inventory management. Regularly counting actual inventory on hand can reduce shrinkage and improve balance sheet accuracy in ways that can benefit any business.

 

About This Author

Mark Henricks is a freelance journalist covering business, entrepreneurship, technology, personal finance, health and fitness  for leading publications.


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